Friday, March 11, 2011

NAMB vs. The Federal Reserve

As I wrote yesterday, both the National Association of Mortgage Broker and the National Association of Independent Housing Professionals filed lawsuits this week to delay implementation of the Fed Rule on loan officer compensation, which is scheduled to take effect April 1, 2011.  The NAMB lawsuit was announced on Wednesday, and as far as I can tell, actually filed yesterday.  Today the Federal Reserve filed a motion asking the federal judge to combine both cases into one suit--to save money.

This is an interesting turn of events, since in NAMB's announcement video, Mike Anderson, NAMB's  legislative chair said clearly that he did not want the NAMB suit to be combined with the NAIHP suit.  He said that he had nothing against NAIHP, but 1. NAMB was arguing the suit from a completely different angle, and 2. the industry has only one shot at getting this rule delayed.  Two separate attacks, one of which might have a chance at success, is better for the industry than one combined attack, which, if defeated, will leave the industry with nowhere to go.

Obviously, the Federal Reserve agrees or they would not be petitioning to have the cases combined.  Apparently, they believe they have a better chance of winning this case if it is heard only once.

In the meantime, in an extraordinarily interesting development late this afternoon, NAMB sent out a letter signed by Senator David Vitter (R, LA) and Senator Jon Tester (D MT). A copy of the letter can be accessed by clicking HERE.   The bipartisan nature of the letter is a tribute to the effort that NAMB is putting into getting the Fed Rule delayed.  The letter, addressed to Ben Bernanke, asks for a delay in implementation of the FRB rule on the grounds that "We are concerned that this rule, which becomes effective on April 1, 2011, may have the unintended consequence of further increasing concentration in home mortgage market [sic]. ..Even before the beginning of the housing crisis in 2007, the home mortgage market has been dominated by three of the largest U.S. banks, which account for more than 51% of residential mortgage originations, with the top two alone accounting for a stunning 43% of the market. Yet to date, the Federal Reserve has declined to provide any written guidance to small mortgage lenders and brokers which would provide clarity and assist them with compliance."

The Senators make a very interesting argument for delay of the Fed Rule.  "In addition, we remain concerned the Federal Reserve has not fully evaluated the impact of this rule on the housing market once the "defense to foreclosure" provisions contained in section 1413 of the Dodd-Frank Act come into effect on July 21, 2011.  Under this section, a violation of rules related to loan originator compensation will allow a borrower to assert that violation as a defense to foreclosure for the life of the loan.  If a borrower prevails in such an action, the borrower is awarded "enhanced penalties" under TILA and every loan originated under that compensation plan would become a liability. The interaction of the Fed's compensation plan with the provisions of the Dodd-Frank Act could have a devastating impact on the mortgage market as large lenders may be unwilling to take the risk of acquiring loans from community banks, mortgage bankers and brokers. Until this uncertainty is resolved it will impair the ability of community-based lenders and small mortgage brokers to compete in the market."

The letter also states that the Federal Reserve has postponed its three final rulemakings until rulemaking authority is transferred to the Consumer Financial Protection Bureau.  This postponement is in the "public interest" because "adopting those portions of the Board's proposals in a piecemeal fashion would be of limited benefit and the issuance of multiple rules with different implementation standards would create compliance difficulties." The Senators urge the Federal Reserve Board to apply this same standard to the Federal Reserve Rule on loan officer compensation.

The letter really makes a fascinating point.  If violations of this sweeping loan originator compensation mandate can be grounds for defense of foreclosure for the life of a loan, the major lenders cannot afford to purchase loans from mortgage brokers or from small banks or credit unions, because they cannot insure that the compensation  agreements are fully compliant.  And with the convoluted rules we see today, chances that violations will occur are better than not.  So not only will the Fed Rule kill the mortgage broker or independent originator (I realize that "mortgage brokers" do not really exist any more since the implementation of the SAFE ACT), but actually the rule will kill the entire secondary market as it exists today. 

It is going to be really interesting to see whether this letter or the two law suits makes any impact. Stay tuned!

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